Year-End Housing Starts Plummet

Housing starts dropped at a double-digit pace in December. Multi-family starts were particularly weak, shocking markets that had expected potential buyers to return to rental housing. Losses were seen across all regions. The largest were on the coasts as foreign investors - mostly Chinese - pulled back, underscoring a concern that has been present for some of the hottest markets.

Single-family housing starts held up better for the month, but are down more than 10% from a year ago. This tracks with concerns builders raised in December about a slowdown in overall market conditions. Affordability has become a real obstacle for first time buyers.

The bad news is that housing construction likely remained extremely weak in January and February. Everything from the government shutdown to unusually bad weather into parts of the South, the largest single construction market for housing, suggests continued softness.

Separately, the S&P Case-Shiller housing price index showed that housing prices slowed to their weakest pace since 2015 in December, further underscoring a pull back by buyers.

The good news is that we could see a bit of a rebound in late spring. In recent weeks, mortgage rates have dropped to their lowest level in a year, while builder confidence has firmed. Most of the confidence is being driven by a feeling that new home sales six months out will improve. Foot traffic in new homes remained weak in February.

We are still playing catch up on the data releases from the government shutdown. New home sales for December are not due out until next week.

Bottom Line

The housing market data confirms other fourth quarter data pointing to a slowdown in the economy at the very end of the year. Persistently strong employment data provides reason to believe that we will see some sort of rebound, but not until spring. This is yet another argument for the Fed to remain on the sidelines regarding a rate hike. Our forecast has the Fed sitting out all of 2019.